Highlights/ Comments

Management reiterated its targeted FY14 sales of 97k units for Toyota (new Vios to contribute 36k units), 1.4k units for Lexus and 197k units for Perodua. Despite the disappointing Jan 14 sales number, UMW enlighten that Feb 14 sales has shown signs of recovery. 2014 will remain tough for Toyota, given similar model launch by close competitors and aggressive campaigning by the various OEMs.

Furthermore, Toyota is impacted by the appreciated US$ against RM, as the imports of CBUs, CKD packs and car parts and components are denominated in US$.

As for the revised NAP 2014, Toyota seems to be way behind competitors Honda and Nissan in exploring new opportunities. While Toyota is still studying the production of CKD Camry Hybrid either by end-2014 or early-2014, Honda has already doubled up its production capacity capable of producing hybrid models (potentially targeting regional export market) and Nissan is expanding its Serendah capacity and new production line for CKD Serena Hybrid.

Strong growth expected from O&G division, given the deliveries of Naga 5-7 (however Naga 7 is only expected to start contribution in FY15) and full year contribution of Naga 4, along with the existing higher rate Naga 1-3. However, UMW will only recognize 55.1% of the division, post the IPO exercise back in Nov 2013 rather than 100% previously.

The Indian automotive parts and components operations remained tough given the political uncertainty (general election by May 2014), economy slow down, INR devaluation, rising interest environment and fuel cost. UMW has already impaired ~RM55m of its investment in India.

On the other hand, the lubricant and automotive parts and components in China are expected to improve in 2014, given increasing car ownership in China.

The outlook for the Valued Group Business (previously under UMWOG) remained uncertain in 2014, as UMW continued to invest in turning around the segment (long gestation period).

Risks

• Prolonged tightening of banks’ HP rules.
• Slowdown in the Malaysian economy affecting car sales.
• Global automotive supply chain disruption.

Forecasts

Unchanged.

Rating

Hold

Positives – 1) Control largest market share of Malaysia TIV with leading brand - Toyota, Lexus and Perodua; 2) Strong growth of Oil & Gas division; and 3) Expanding reach of Manufacturing & Engineering division into fast growing China and India.

Negatives – 1) High crude oil prices affecting margins of its oil based products i.e. lubricants; 2) Tightening of bank’s lending rules; and 3) Intense competition from rival automotive marques.

Valuation

Maintained Hold with unchanged Target Price of RM12.40 based on SOP.

Source: Hong Leong Investment Bank Research - 28 Feb 2014